Mixed Economic Signals Have Been "Noted" by Traders
Fundamentals
Traders of U.S. Treasuries have to be shaking their heads in confusion regarding the near-term direction of yields due to confliction fundamentals being released the past few sessions. Earlier this week, September 10-year Note futures prices fell sharply, as Monday's release of the ISM Manufacturing Index came in a better-than-expected 48.9 in July, vs. 44.8 in June. This was well above pre-report estimates of 46.5 and coming ever so closer to the 50 reading, which signals growth in the manufacturing sector. This good news for the economy combined with a surging equities market sent government debt traders into a selling frenzy. However, on Wednesday, the ISM Services Index disappointed traders, having fallen to 46.4 in July, vs. 47 in June. The widely anticipated employment figure also fell to 41.5 in June. On top of this, the ADP private sector jobs survey showed that payrolls fell by 371,000 in July, which was 21,000 more than estimates and could force traders to revise downward their estimates for Friday's always anticipated non-farm payrolls report for July from the current loss of 275,000 jobs. In addition, the Treasury announced the size of its quarterly refunding in August, with the Treasury auctioning a record $75 billion next week. Although it remains to be seen how long investors (particularly foreign buyers) will accept current low yields for U.S. government debt, given the size of the current deficits and the weakening U.S. Dollar, but with no signs that the Federal Reserve's policy of quantitative easing is going to be discontinued anytime soon, buyers may continue to flock to the treasury auctions despite current yields.
Trading Ideas
Given the divided opinions on where Treasury yields are headed, we may be in for an extended consolidation period for Ten-year Note prices. One trading strategy that looks to take advantage of market consolidation is the selling of option strangles. An example of this type of trade in the Ten-year Note options would be selling a September Ten-year Note(TYU9) 118 call and selling a September Ten- year Note(TYU9) 114.5 put. With the TYU9 trading at 116-06 as of this writing, this strangle could be sold for 23/64th, or $359.37 before commissions. The maximum profit would be realized if TYU9 is trading at or below 118-00 or at or above 114-16 at expiration on August 21st. Given the potentially unlimited risk involved in selling strangles, traders may wish to exit the trade before expiration if TYU9 trades at or above 118-00 or below 114-16 before the options expire.
Technicals
Turning to the daily chart for September 10-yr Notes, we notice that prices seem to be forming a descending triangle pattern. This pattern is usually seen in a downward trending market as a continuation pattern. During this time, prices consolidate, but ultimately move in the direction of the current major trend, which is lower. To confirm this pattern, traders would want to see prices break below the recent lows on higher than average volume. Also note that prices are below both the 20 and 100-day moving averages, which can be considered bearish by both longer and shorter-term traders. The 14-day RSI is in neutral territory, with a current reading of 46.24. Support for September 10-yrs is seen at the recent lows of 115-13, with resistance found at the 100-day moving average currently near the 118-08 area.
Mike Zarembski, Senior Commodity Analyst
